Consider the following options portfolio: You write a November 2014 expiration call option on Facebook with exercise

Question:

Consider the following options portfolio: You write a November 2014 expiration call option on Facebook with exercise price $80. You also write a November expiration Facebook put option with exercise price $75.

a. Graph the payoff of this portfolio at option expiration as a function of the stock price at that time.

b. What will be the profit/loss on this position if Facebook is selling at $77 on the option expiration date? What if it is selling at $83? Use option prices from Figure 15.1 to answer this question.

FIGURE 15.1

Options on Facebook, October 16, 2014

Underlying stock price = $75.95 Facebook (FB) Expiration Strike Call Put Oct-14 75 3.95 3.01 Oct-14 80 1.65 5.72 Nov-14

c. At what two stock prices will you just break even on your investment?
d. What kind of "bet" is this investor making; that is, what must this investor believe about the stock price in order to justify this position?

Portfolio
A portfolio is a grouping of financial assets such as stocks, bonds, commodities, currencies and cash equivalents, as well as their fund counterparts, including mutual, exchange-traded and closed funds. A portfolio can also consist of non-publicly...